What is Monero?

Cryptographers and privacy advocates have always been searching for the Holy grail of anonymous online transactions.

According to the Universal Declaration of Human Rights, the right to privacy is included in Article 12, which states that "No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation." As long as the activity undertaken by the individual does not bring harm to others, most people are allowed to do whatever they choose.

This includes transactional activity like what each person buys with their money. Before the advent of cryptocurrencies, cash transactions were the preferred instrument of choice, even if the dollar bills themselves could be traced by authorities if necessary. Everyday transactions involving small amounts aren't traced at all, as a lot of resources would need to be involved. These resources are usually reserved for tracking cash involving criminal activity.

In 2013, the year the Silk Road dark market got closed down by the FBI, Bitcoin was the only known cryptocurrency around and it was the de facto currency of choice for many criminals. Due to the pseudonymous nature of Bitcoin, everyone mistook that for anonymity because no personal data was involved, thinking that these transactions couldn't be traced to specific individuals. They didn't realise that because Bitcoin uses a public ledger, anyone can view these transactions, and with enough effort and smarts, linking wallet addresses to IP addresses and then to individuals was only a matter of time.

How this was done has been detailed in "Tracers In the Dark", a book about how law enforcement, through using tools provided by Chainalysis, was able to crack down on dark markets.

Once it became known that Bitcoin transactions weren't as private as everyone thought, a search began for another cryptocurrency that could offer the ultimate form of privacy. Enter Monero, the privacy-focused cryptocurrency that offers true anonymity to its users.

In this Monero review, we are going to explore more about Monero, how it came about, how it works, the pros and cons, and its place in the cryptocurrency space.

Monero Review Summary 

Monero is a privacy-focused, decentralised, and censorship-resistant cryptocurrency with strong security. Its users can send transactions over the network, which is opaque by design, without revealing the amount sent or the address of the sender to the casual observer.

The Key Features of Monero (XMR) Are

• Ring Signatures - mixing the digital signature of the sender with 10 others in every transaction group.
• Stealth addresses - one address that auto-generates numerous single-use addresses for each transaction.
• A private "view key" is required to check the details of a transaction.
• RingCT - also known as Ring Confidential Transactions, this feature mixes the amounts sent so that the amount involved for each transaction cannot be easily tracked without the appropriate access.

Monero Pros and Cons

Before delving deeper, let's take a look at some of the pros and cons of Monero. 

Before we can delve into the technology of Monero, we have to understand why Bitcoin is not private and Bitcoin's flaws.

Bitcoin's Flaws

Initially, many thought of Bitcoin as the de facto currency of privacy. There were no names attached to the wallets and money could be sent freely and easily across borders with no interference of regulatory agencies. Yet, as it has become more popular people have realised that the very public nature of its blockchain means that individuals can quite effectively monitor and trace payments online.

This was one of the main motivations behind the creation of Monero, the privacy-focused digital currency.

Although the technology behind Bitcoin is indeed revolutionary, it is not without its limitations. As we have seen recently, there are many developers who are trying to improve the Bitcoin protocol concerning scaling, transaction times, etc.

Privacy

Although Bitcoin is indeed anonymous, the nature of the Blockchain means that people can easily see the transaction activity on that wallet. Whenever money has to flow between these wallets, they are entered into the public ledger.

Your Bitcoin address, which is a collection of random strings and digits, cannot be linked to you. Yet, the transaction chain that links your wallet to an account at a Fiat money exchange can easily reveal you. There are companies such Chainalysis, which have software to easily identify movements of funds.

Some people think that this is a positive trend as it will allow for the more mainstream adoption of cryptocurrency and will flush out the likes of the criminal and darkweb underbelly. 

However, there are still a large number of people who would like to use their cryptocurrency without people knowing how much they have, who they are sending to and who they are receiving from.

Fungibility

Every place that every Bitcoin has ever been to can be traced on the blockchain. This means that you might have "tainted" Bitcoin in your possession, even if you did not engage in any illicit activity. If some of the Bitcoin you have happened to belong to some drug kingpin once upon a time, if that Bitcoin were ever banned in the future, you might end up with an unexpected loss, or at the very least, be needing to answer some questions by the authorities as to why your crypto wallet address contains Bitcoin tied to criminal activity.

Monero vs Bitcoin

Monero (XMR) is a cryptocurrency that makes use of blockchain technology to facilitate transactions. These transactions are also mined by computers that verify the transactions.

Yet, unlike Bitcoin, Monero uses advanced crypto graphical concepts such as "ring signatures" in order to hide your transaction from the blockchain as well as how much money you have in your public wallet address. Monero is also able to hide the amount of money that is being sent to you. Here is a fantastic diagram from Exodus, highlighting the differences between Bitcoin vs Monero:

Although this may satisfy privacy advocates, there are a number of other notable advantages of Monero over Bitcoin

• ASIC Resistant Mining: When Bitcoin first started being mined back in the early days, people were able to mine it on their home computers using CPUs. This was because the computational difficulty was not as high as it is today. Nowadays, there are very expensive Application Specific Integrated Circuits (ASICs) which are used to mine Bitcoin. These are usually in the hands of large-scale mining farms that have invested large amounts of money. As such, the very nature of decentralised mining has become rather centralised. With Monero, the Cryptonote RandomX mining algorithm is resistant to this type of hardware and as such, keeps the mining decentralised
• Adaptive Block Size: The limit on the size of the Bitcoin blocks can lead to significant congestion on the network. Monero was coded such that the block size will automatically adjust should the transaction volume require it.
• Kovri I2P Protocol: When transacting with Monero, all of the transactions are routed through the I2P invisible internet project. This will ensure that no one can snoop on your internet activity and monitor what you are doing. This means that people won't even be able to tell that you are using the Monero network at all when you are online.
• Transaction Fees and Speed: Monero boasts of cheaper transaction fees than Bitcoin and the first confirmation only requires about 2 minutes to appear. However, transactions are considered fully recorded on the blockchain after at least 10 confirmations, which takes about 20 minutes. In contrast, Bitcoin requires about 10 minutes for its first confirmation, but the funds can then be spent as soon as the next minute after confirmation is reached.
• Fixed Supply vs Tail Emissions: Monero's total supply has basically been mined but there is a Tail Emissions program where 0.6 XMR will be issued for every mined block. Bitcoin's still got less than 2 million left before all 21 million is mined.
• Frequency of Forks: Monero forks more often than Bitcoin as the development team is regularly upgrading the protocol with the latest privacy features. Bitcoin doesn't have too many core developments done to it and thus, each fork needs to be carefully considered as it can have wide-ranging effects.
• Speed of Adoption: Bitcoin, being the most well-known cryptocurrency, has a higher adoption compared to Monero. It is more widely used and accepted, even having nations like El Salvador adopt it as legal currency. Meanwhile, Monero has a scalability issue and a slightly steeper learning curve than Bitcoin, which prevents it from gaining wider adoption.

Okay, now that we've done some comparing and contrasting, let's get into Monero.

What Is Monero?

Unlike Bitcoin or Ethereum, where all transaction details are available to anyone, Monero is a decentralised blockchain network that uses privacy-enhancing techniques that prevents any unrelated parties from being able to view transaction details in full. Information such as the sender, receiver, and amount are all hidden from public view.

The only way for the veil to be lifted is by entering a "view key" in the appropriate column. This makes Monero a public blockchain with privacy features embedded in its design. This is not to be confused with a private blockchain, which is usually owned by an entity and participation is only by invitation.

The History of Monero

Most blockchain projects follow a generally straightforward formula of "person has an idea -> get together a team -> build -> raise capital -> launch" with numerous variations thrown in. With Monero though, its inception is full of intrigue that would likely make for a great Netflix drama like The Billion Dollar Code, which is about the invention of Google Earth.

Monero, Esperanto for "coin," is a fork of another project called "Bytecoin" from back in 2013. The team based their project on the CryptoNote white paper written by Nicolas van Saberhagen. They first published their code on GitHub on Nov 2013. The Bytecoin project surfaced in the Bitcointalk forum in March 2014 and raised quite a few eyebrows in the community when they found out that 80% of the coins were already mined. At this point, someone from the Bytecoin team came out to explain that the project is not a new one.

Lots of people weren't buying this explanation, but there was renewed interest in the CryptoNote project. It then became clear that the next step was to fork a better version of the Bytecoin project. The winner was thankful_for_today as a post was made on April 9th, 2014 for another project called Bitmonero.  

Several developers rallied around this project and a community of core developers was formed. The project launched on April 18th 2014. Not long after, the core dev group found it difficult to continue collaborating with the founder due to seemingly suspicious behaviour. Eventually, the community took over the project, shortened the name to Monero, and has kept it up and running since.

Monero is one of the few examples of a blockchain project where the community played a major role in the development of the project, thus it is a truly community-first project. 

How Monero Works

Now we will cover the different functions of Monero, covering how each one functions.

How Monero Transactions Works

Although Monero seems like a relatively straightforward concept, the actual mechanics behind a Monero transaction are quite involved. It incorporates some of the most advanced concepts of modern cryptography and computer science. In the interest of making this comprehensible to most of the general public, we will provide a high-level description of how a Monero transaction works and how it remains private.

For those interested in studying the underlying technology of a transaction, the original Monero whitepaper is available for public view. 

Sending Monero

Like Bitcoin, a Monero user will have a public address that is a set of strings and numbers. However, unlike Bitcoin, there will not be any funds that are directly associated with this address.

When you send some Monero to someone else, a temporary public address is created. This address has also only been created for the exact purpose of this transaction and is brand new. Hence, the public blockchain does not have any record of that transaction.

This, of course, goes both ways. When you send funds, the source of the funds is not recognised as your public address. Hence, nobody can tell that you sent Monero to someone else on the network. These addresses are termed “stealth” addresses and are known by no one.

A public view key allows you to see the stealth addresses associated with that particular transaction.

Finding Your Monero

Of course, the recipient has to be able to claim his / her funds from the stealth wallet. In order for the recipient to receive these funds, they have to scan the Monero blockchain to find their transaction. They do this with a private view key. This checks each transaction to see which of those apply to the receiver. This key allows the user to see all the incoming transactions to the wallet but not the outgoing ones.

This secret key is only known by the receiver. This means that no one else can look into the blockchain and identify any payment that was not related to them. You can also give this secret key to someone else and they can also scan the blockchain to see if any funds were sent to them.

Transaction Mixing

With the transaction above, there is an unlinkability. What this means is that no one who is viewing the Monero blockchain can link a transaction to your public address. However, the original sender of the coin is still able to see when the recipient is sending funds. In order to avoid this, Monero uses “ring signatures”.

These signatures are what allow the transaction mixing. When the sender sends a transaction, the protocol randomly selects other user funds to also appear in the transaction. Hence, these senders could also be a source of the funds that are being sent.

When using these ring signatures, no one can tell who is actually sending the funds, not even the person who originally sent the funds to the recipient.

Obviously, with the nature of crowds, the more people that are added into the mix, the more obscure the transaction. The number of people that are included in a transaction mix is referred to as the “mixin level”. You can increase the size of the mixin level but this will then increase the fees needed to use the network's computational resources. Currently, the number of signatures defaults to 15.

To the person who sent you the funds, even if you are not transacting, it will look like you are. As you are connected to the network, there will be the appearance that you are continually sending money to everyone the entire time.

You may also be asking that if all the transactions are masked and no one can tell who is sending Monero across the network, how do miners ensure that Monero is not being double-spent? This is made possible by the use of “key images”.

Key images is a cryptographic key derived from an output being spent and is part of every ring signature on the blockchain. There is only one key image for each output on the blockchain. Due to the cryptographic properties, one can’t tell which output produced which key image. All used key images are maintained in the blockchain so miners can verify no transaction is spent twice.

Ring signature technology is also used to hide exactly how much money is being sent. Ring Confidential Transactions (RingCT) is a standard feature in the Monero protocol that uses a cryptographic function to mask the amount of the transaction from the blockchain but not from the sender and receiver.

Hiding IP addresses

Monero also uses Dandelion ++, a feature that allows the IP addresses associated with the nodes in the network to be hidden from VPNs and Internet Service Providers (ISPs). That makes it difficult to know where are the nodes located in the network, thus ensuring another layer of privacy on the network to protect its users.

The Advantages and Disadvantages of Monero

Advantages

Privacy-first approach with industry-leading privacy tech - privacy mode is the default mode when transacting on Monero. You can't really opt out of it, but you can make your own transactions transparent by providing the viewing keys to other parties to check that a transaction went through.

Strong Community - The project started as a grassroots community movement and it's the strength of the community that has carried the project since.

Fairer mining process than Bitcoin - Mining Monero does not require any kind of heavy-duty machinery. This allows anyone with a normal CPU to become a node and participate in securing the network.

Multi-language seed phrase - Monero allows for the seed phrase to be generated in languages aside from English. Currently supported languages are German, Spanish, Portuguese, Russian, Chinese, Japanese, French, Italian, and Dutch.

Disadvantages

Limited mining pools - Not only is the number of mining pools smaller than many other blockchain projects, but only a handful of mining pools are also generating most of the hash power.

Permissionless - This is a standard feature in almost all blockchain projects and is usually lauded as a plus. However, in Monero's case, this also makes it the preferred blockchain for criminal activity due to its privacy focus.

Regulatory scrutiny -Since it attracts criminals, it will also attract regulators. You see a cops-and-robbers scenario happening on the Monero playground.

Steep learning curve for users - Being a privacy-based blockchain, it's not as straightforward as using a regular public blockchain.

Development difficulty - The programming language used by Monero is C++, which is a fairly common language, unlike Haskell used by Cardano. However, the additional privacy technology makes the development itself difficult.

Limited actual-use adoption - In order to check whether a payment is made, the receiver needs to use a view key to see all incoming transactions to their wallet. This makes it not as commercial-friendly as a public blockchain. The scalability of doing this is also something to watch out for.

What Makes Monero Different?

Privacy Coins

If you're a regulator, Monero would be the number 1 target on your hit list as it's darn difficult to trace anything on that network. By that same token, that's what makes it the favored privacy coin for both good and bad actors. While I'm unable to show you the network volume, at least the token's ranking and market cap can give you an indication of its popularity.

What makes Monero so popular amongst privacy coin enthusiasts is that privacy is a default feature, not opt-in like the other privacy coins such as Zcash, Dash, or Litecoin's Mimblewimble version. There's no need to decide which of your transactions are public and which are private.

Key privacy features are embedded on the Monero protocol level, and it doesn't rely on only one type of privacy measure to keep these transactions secret. It also does not allow for any kind of back door available to catch criminals, unlike Zcash, which has one.

Dash, another privacy coin competitor, uses Masternodes in its network to handle all the private transactions, known as PrivateSend. These nodes use the Proof of Service consensus mechanism, which is in addition to the Proof-of-Work consensus used by regular miners to secure the network. However, the number of Masternodes is smaller compared to all the nodes in the network, thus making it easier to trace all the private transactions on the network. 

Challenges for Monero

Even though it's the darling for privacy coins, Monero still has room for improvement. There are several risks that would be good for us to know about as part of our review for this project.

Janus attack

The mechanics of this threat is that the transaction seems to be sent to wallet A's subaddress but it's actually sending to wallet B's subaddress. The point of this isn't to steal funds but to compromise the wallet owner's privacy by revealing the two subaddresses.

This is possible because when the wallet scans for incoming transactions to the subaddresses within itself, it trusts that the sender will let the wallet know the particular subaddress the funds are going to.

Metadata Issues

There's only so much Monero can accomplish on its own when it comes to the metadata generated by being on the Internet. Things like obscuring network traffic is out of Monero's scope and would require other tools to help do that.

Poisoned Outputs

How this works is that two parties collude to target a third party by sending them outputs and analysing where the transactions graph. This graph displays the transactions and the addresses the funds were sent to. It's possible to work out who owns what addresses, which greatly compromises the privacy of the wallet owners.

This is not a problem that can easily be rectified using technology and is something to be wary of.

Regulatory Whack-A-Mole

As we mentioned earlier, regulators would do what they can to peel the many layers of Monero as quickly as possible while Monero developers would be doing their best to stay just one step ahead. This is also why Monero upgrades are fairly frequent. How long Monero can evade the authorities is anyone's guess. It would not be pleasant once the privacy armour gets cracked and would pose a fairly sizeable risk to the project.

How to Buy Monero (XMR)?

If you would like to get your hands on some Monero, you will need to head on over to a cryptocurrency exchange. XMR is listed on several different exchanges but some of the biggest include the likes of Binance and Kraken. These exchanges allow you to purchase Monero via credit card or with funds transferred from the bank.  However, you will need to go through KYC to deposit fiat funds into the exchange or make a fiat withdrawal.

How to Store Monero (XMR)?

Once you have your XMR you will want to move them onto a secure storage device. This is because it is not safe to store a large holding of coins on an exchange given the numerous risks that are posed. Monero GUI wallet is one of the top wallets for storing your Monero coin. We also have an extensive list of Monero wallets for your consideration.

Monero in the Future

A quick peek at the Monero roadmap shows that the team is starting to think of some kind of cross-chain functionality between Monero and other chains, notably Ethereum. A line item called Monero - Ethereum Atomic Swap hints that there could be something like that in the works. There are also considerations for a second-layer solution being made to address Monero's scalability issue. Hopefully, this won't be a new attack vector that could be a weak link in its privacy armour.

Closing Thoughts

Privacy itself, just like any tool, can be used for both good and nefarious purposes. This same concept would apply to a project like Monero, whose community believes everyone has the right to keep their transactions private. It's not about having nothing to hide but about each person's sense of individual boundaries. While it is unfortunate that criminals are also attracted to Monero because they do have something to hide, it doesn't make sense to throw the baby out with the bathwater.

As long as we value each person's personal space, everyone should be given the option to decide what kind of transactions they want to remain private. For these transactions, Monero may just be the first one to pop into their minds.